Bank of Canada holds rates and asset purchases steady in September

In a much-anticipated move, the Bank of Canada held steady with its monetary policy in its September update today:

  • Interest rate held at +0.25%
  • Asset purchases were maintained at a target pace of C$2bn per week (down from C$5bn at the height of the pandemic). 

Whilst the BoC is on a tightening path, there was plenty in the statement to suggest this is going to be a gradual tightening:

  • There is “considerable slack” in the labor market, with particularly low-wage workers still disproportionately affected.
  • Inflation above 3% is expected to be transitory, whilst medium-term inflation expectations remain well-anchored, with wage rises having been moderate to date (despite the supply chain disruptions).
  • The Governing Council judges the economy still has “considerable excess capacity”.

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According to the BoC projections, it seems that any potential interest rate rises will be an H2 2022 story.

What this means

The Bank of Canada has begun tightening monetary policy with a taper of asset purchases (down from C$5bn to C$2bn per week). However, this tightening is fairly gradual and the accommodative monetary policy remains necessary. 

It seems likely that it will be another 12 months from now before any rate hikes are seen. This leaves the BoC slightly ahead of the Fed is tightening, but not by that much.

CAD was strong from March 2020 to June 2021, since when there has been a corrective move. This BoC does little to stop the corrective move near term. 


Initial Market Reaction

The Canadian dollar (CAD) was initially choppy in reaction but is now weakening once more.

USD/CAD has moved around +80 pips higher since the BoC announcement.

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